Herbalife Liveblog: How to Challenge a Hedge-Fund Short

By Brendan Conway

I’m at the much-anticipated investor day for Herbalife (HLF), the health-products company that is battling back against hedge-fund manager Bill Ackman’s short attack. See below for our live blog from the morning, and here for the late morning.

If you’re new to this story, read here and here for the background on Ackman’s accusation that Herablife is a pyramid scheme — against which the stock has battled back to just under $40. Read here for whyThird Point Capital’s Dan Loeb took an eight percent stake in the company — setting up a battle of well-known hedge-fund managers. Shares are rising more than three percent in premarket trading.

9:01 a.m.: An investor relations official kicks off with the usual disclaimers: Forward-looking statements, etc.

9:02 a.m. Chief executive Michael O. Johnson takes the podium. “We are proud of a company that has created opportunity,” he says. There’s been a “tremendous amount of misinformation,” pledging to counter it today. Johnson pledges to debunk the core misstatements by Pershing Square Capital Management and show that Herbalife is a “legitimate” company whose transparency is “unrivalled in our industry.”

9:09: Goudis says Pershing is wrong to suggest Herablife isn’t a products company. “We’ll show you that Pershing intentionally used misinformation,”he says, pledging to counter it.

9:11 a.m.: Goudis responds to Pershing’s charge that the company doesn’t spend on R&D. He says the company used a strict GAAP definition when it said it had no R&D. “Let’s take a look at what they chose not to share with you,” he says. He compares Herbalife’s R&D with competitors GNC and Nature’s Bounty, whose R&D expenditures are in line with his own.

9:13 a.m.: Goudis spends a few moments on product purity. He’s lost me in an argument about the stringency of the company’s product standards, up to and including testing expiration dates, how well the product holds up against temperature change, and how it tests for microbiological impurity.

9:20 a.m.: Goudis says the company has over 300 distribution points around the world, not the three that Pershing claimed. If you count non-company locations the number rises to six hundred, which Pershing would have known “if they had called,” he adds.

9:22 a.m.: Pershing would have you believe that Herablife’s products are two to three times more expensive than competitors. “When you use the correct measure, and that is price per serving,” the products are “very competitively priced,” Goudis says.

9:23 a.m.: Goudis says Pershing inccrrectly uses eBay (EBAY) prices as a proxy for market prices. Most people look to eBay for a discount. he says. He’s got a slide, but the item zips by in less than a minute and I can’t get a moment to see it.

9: 25 a.m.: Vasilos Frankos, Ph.D, take the podium. Former director of the dietary supplement division of the FDA.

9:26 a.m.: Frankos explains why he moved to Herbalife after his government career. “I wanted to continue my career with a company that treated its customers the way I treated consumers at the FDA,” he says.

9:27 a.m.: Frankos lambastes what he calls Pershing’s “false and misleading comparison of Herablife with pharma R&D.” Unlike pharma companies’ patent protection, food and supplement companies cannot patent their nutrients, or natural ingredients, he says. “You can’t patent Vitamin D, or Vitamin C, or fish oil,” he says. Herablife spends its R&D budget on ensuring its products are safe, high quality and tasty, he adds. Herablife spends $44 million “in support of science across the company,” he says.

9:34 a.m.: Investors aren’t particularly impressed judging by the open of trading Thursday, but neither are they frightened. Shares are down fractionally four minutes after the open, at $39.80.

9:35: Wrapping up his remarks, Frankos says the company’s commitment to science and quality is “unparalleled” in the industry.

9:37 a.m.: President Des Walsh takes the podium.

9:38 a.m.: Walsh pledges to take on Ackman’s claim that there aren’t many customers outside the distribution network.

9:39 a.m.: It is “no different from Costco,” (COST) says Walsh, which has less visibility to the customers to whom its members sell.

9:39: Walsh says the firm will do away with the “myth” that there are no outside customers, via survey research by Lieberman Research. “Our distributions every single day are selling to millions of customers outside our distribution channel.”

9:40 a.m.: Kim Rory of Lieberman Research take the podium.

9:42 a.m. Lieberman’s survey of 2,000 respondents shows that five percent of the adult population said they bought Herbalife products recently, a “large” consumer base, she says. “That’s 5.5 million households,” she adds.

9:43 a.m.: Three-quarters of respondents said they signed up just to get the discounts on the product, says Roy.

9:45: Walsh is back on the podium. He says Pershing’s Shane Deneen — despite his good Irish name — has it wrong when it comes to Herbalife’s customers, pointing to Lieberman’s findings.

9:48: Sixty three percent of “failed” Herablife distributors still recommend their friends and family sign up, Walsh says, citing Lieberman’s survey findings. “These stats don’t indicate victims,” he proclaims. “In leaving Herbalife their message was ‘Good company, good products, good people, It just didn’t work out for me,’” he says.

9:55 a.m.: The nutrition clubs’ appeal is about a shake, a tea … “and a hug,” says Walsh. “The reality is that many of these communities are in lower income neighborhoods, where people have a need for education about nutrition,” he says. They perform a “hugely valuable public service,” but that’s now how they were characterized by Pershing, Walsh adds.

9:57 a.m.: Walsh pledges to show you more about the dilapidated-looking clubs featured by Pershing last month. One of them shows up on the screen with an awning that reads “Vida Bella.” “Inside this club is the real America,” he says.

9:59 a.m.: Members are shown in a series of videos happily drinking shakes in clubs around North America. Latinos are heavily represented. Walsh says many found Pershing’s portrayals of the clubs offensive.

10:03 a.m.: Investors are apparently in a better mood by 10 a.m. — shares are up by 4.1% on the session. Are those cheery videos having an effect?

10:08 a.m.: Walsh takes on the pyramid scheme accusation, deploying some data. Eighty percent of people earn more than their sponsor, “because our business is a meritocracy,” Walsh says.

10: 13 a.m.: Herbalife is “confident” that the adverse court decision in Belgium will be reversed, Walsh says. The decision plays a role in Ackman’s short thesis. It has “no impact on our business,” Walsh says.

10:16 a.m.: 92% of Herbalife’s growth is coming from markets that the company entered 10 years ago, Walsh says. This point is meant to counter Ackman’s claim that Herbalife shows a “pop and drop” sales pattern, wherein older, mature markets eventually die off.

10:18 a.m.: Walsh says he finds “hugely offensive” the fact that a supermarket can enter a lower-income area and be “applauded for bringing good nutrition and jobs to a low-income community,” but Herbalife. Why not us? Walsh asks.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 3 comments

JANUARY 10, 2013 9:48 A.M.

Ricky wrote:

With 60% of Americans overweight and it being number one health problem and number one cost for health care companies like Herbalife are at least combating this epidemic with a proven product of 32 years I have lost 82 pound on products and never felt better, my doctor told me to keep doing what I'm doing an has taken me off 3 medications NO ONE WOULD BUY THE PRODUCTS TIME AND TIME AGAIN IF THEY DID NOT SEE RESULTS Ackman hired some companies to going looking for dirt but problem is he chose the wrong company and now fellow hedge fund managers will squeeze him hard his short looks very unstable now

JANUARY 10, 2013 10:23 A.M.

ulrike wrote:

I have been in company for 12 years I got involved because of my products results lost 33 pounds I do it part time and enjoy helping my customers and make a fantastic part time income working around my 3 children of 6 9 & 12 but some of my distributors below me have done very well why because they work very hard and have paid the price for success I have seen it so many times when people get in this business and think there going to get rich & they do not last long and don't understand it's a business it takes time and hard work strong focus and you have to care more about your customers and your distributors then the money

JANUARY 10, 2013 1:29 P.M.

Bill Ack wrote:

hedge fund short bums will lose on this one.

Loeb is smarter and better informed with a more impressive track record.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.